Government Reverses Itself on Online Gambling

After years of holding that the 1961 Federal Wire Act made online gambling that crossed state lines illegal, the Department of Justice reversed itself on December 24th, 2011, giving the states a huge gift. Bob speaks with gambling expert I. Nelson Rose, who says that cash-strapped states are now likely to loosen rules on online gambling, and that will mean big money and new jobs.

On December 24th, the U.S. Department of Justice delivered an astonishing Christmas gift to 44 states of the Union, a gift because it unleashes billions of dollars in revenue and astonishing because it reverses a longstanding interpretation of a 50-year-old law. The Justice Department said it would no longer invoke the 1961 Federal Wire Act to forbid in-state Internet gambling, freeing states to run their lotteries online and to issue tax revenue-producing licenses to online casinos. For many in the gaming industry, which is what the gambling industry calls itself so it doesn't have to call itself the gambling industry, the move was long overdue. The Wire Act, after all was enacted to outlaw a particular kind of bookmaking fraud.

I. Nelson Rose, distinguished senior professor at Whittier Law School, says you probably know the illegal scam. It was the central premise of the movie The Sting.

[CLIP]:

TRACK ANNOUNCER:

- Star. Into the backstretch, it's Lucky Dan in the lead, Dr. Twink a half, Orchid ahead, I'm a Dreamer by one, followed by –

[SOUND UP AND UNDER]

HAROLD GOULD AS KID TWIST:

Everything going all right?

ROBERT SHAW AS DOYLE LONNEGAN:

You got nothin' to worry about. I put it all on Lucky Dan, half a million dollars to win.

KID TWIST:

To win!

[END CLIP]

I. NELSON ROSE:

The Wire Act was designed to cut the wire, and the wire was a telegraph wire that let illegal bookies get the results of horse races before the betters. And it wasn't even clear that it would apply to telephones, but then came the Internet and the Department of Justice was faced with trying to close down something it considered illegal, without any laws on the books to do it.

BOB GARFIELD:

What was the effect on the states?

I. NELSON ROSE:

It basically scared all the states into not legalizing most forms of Internet gambling because they were afraid the federal government would come down and arrest them for organized crime violations under the Wire Act.

BOB GARFIELD:

So now states are free to put their lotteries up online, as long as they don't sell across state lines?

I. NELSON ROSE:

Well, it – yeah. The impact of this is going to be really big because not only does it mean the states can do intra-state Internet selling of lottery tickets, there's now no federal law that says they can't do inter-state or even international, with the exception of sports betting. And there is a challenge even to the separate federal statute that limits sports betting.

BOB GARFIELD:

I want to ask you about another federal law that applies here, and that's from 2006. It explicitly bans the transfer of funds by banks and other financial institutions in service of online betting. Where did that come from and where does that stand?

I. NELSON ROSE:

Well, it's the Unlawful Internet Gambling Enforcement Act. It was rammed through by Bill Frist. When the Republicans controlled both houses, he was the majority leader of the Senate. And President Bush signed it and it was rushed through so fast, it doesn't even have a good acronym.

[BOB LAUGHS]

Nobody knows how to pronounce UIGEA.

BOB GARFIELD:

Yeah, so UIGEA was rammed through the Congress and signed by the President [LAUGHS]into law.

I. NELSON ROSE:

Right.

BOB GARFIELD:

And didn't that shut down the online poker industry?

I. NELSON ROSE:

Yes, it scared all of the publicly traded companies like Party Gaming, which was running Party Poker, out of the U.S. market. It instantly wiped out eight billion dollars in equity.

BOB GARFIELD:

Now, I ask you this question not as a journalist but as the world's worst online poker player.

I. NELSON ROSE:

Yes.

BOB GARFIELD:

Does this mean that I'm gonna get my game back?

I. NELSON ROSE:

You are eventually gonna get your game back.

BOB GARFIELD:

All right, that's swell for me. I can now squander endless hours playing No Limit Hold 'Em with strangers from all around the world. But I'm curious about the state lottery side of this.

I. NELSON ROSE:

Yes.

BOB GARFIELD:

You know, great, the states are now free to enter the online world with impunity, but state lotteries have always been problematic because they are essentially the world's most regressive tax. They are money that is lost by the most vulnerable people in great sums to fund some governmental good work. Is that problem not going to just be amplified, maybe exponentially, once gambling is legal online?

I. NELSON ROSE:

It's not the most regressive tax. State lottery is almost exactly as regressive as a sales tax, which means it does hit poor people more than wealthy, but it's actually not the very poor.

It's the working poor who would be most hit by a state lottery. And the Internet attracts people with slightly higher incomes, so Internet sales will be less regressive, if you view it as a tax, than paper lottery ticket sales.

BOB GARFIELD:

If you agree that to some degree it's a sort of Faustian bargain, the state getting the benefit of income from people who are substantially the working poor, does going online enable the state to regulate how much an individual can spend, for example, in a way that they can't regulate it for people standing in lines at liquor stores?

I. NELSON ROSE:

Oh yeah, absolutely. I mean, there are actually better protections, even against children playing because you can compare driver license database and other court records and property ownership and such.

But for compulsive gambling they have a lot more protections in place and a lot easier to send messages saying, hey, here's someplace where you can get help.

Of course, the problem is if players don't want to do this, they can go to another site. The good thing about this is that most people are going to want to play on those state- icensed sites because they know they'll be honest and they'll get paid, if they win.

BOB GARFIELD:

Nelson, thank you so much.

I. NELSON ROSE:

Thank you.

BOB GARFIELD:

I. Nelson Rose is a professor of law at Whittier Law School. His website is Gamblingandthelaw.com.

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